Apple’s array of new and expected upcoming services may just be the key to better monetization in the future. Interestingly, the company’s stock is trading at a 30% discount to the S&P 500’s multiple of 16 times even though it is expected to return a 9% compound annual growth rate for earnings between this year and 2017.
Apple starts shifting toward services
One of the biggest areas of concern for AAPL investors has been worries that the company is too reliant on iPhone sales. But while analysts continue to expect a very strong iPhone 6S cycle, it seems clear that Apple is preparing for a time when iPhone sales aren’t enough to continue spurring meaningful growth, suggest Goldman Sachs analysts.
Simona Jankowski and her team said the reason AAPL stock is trading at such a significant discount to the S&P 500 is because it’s considered to be a hardware stock. Hardware companies have historically encountered difficult times because of factors like market saturation for their technology, and as a result, they’re reliant on one-time sales. Also visibility into the next year’s product cycle remains unclear.
Because of these issues with hardware companies, Wall Street has been rewarding firms that shift toward more recurring revenue streams than hardware sales, and Jankowski thinks AAPL is in the process of developing its own recurring revenue streams.
AAPL focus to shift toward recurring revenue
The Goldman Sachs analyst believes that over the course of the next year, Wall Street will shift its focus for AAPL from unit growth, which of course is slowing due to smartphone market saturation, to monetization of the company’s installed base and recurring revenues. Jankowski and team calls this transformation “Apple-as-a-Service,” playing off the recurring revenue business models for platform-as-a-service and infrastructure-as-a-service. Because of the shift they see going on at Apple, they have added AAPL to their Conviction Buy list.
They estimate that Apple has an installed base of about 500 million “loyal” users of the iPhone, which they believe provides a “significant multi-year opportunity” for the company to increase the monetization rate of that installed base.
Apple attaches more service
Apple has been rumored for quite some time to be working on a streaming TV service of some kind, and Jankowski sees this as an important opportunity for further monetization of the company’s installed base. The already-launched Apple Pay and Apple Music also present monetization opportunities for AAPL. Further, she expects these services to cause Apple fans to purchase even more hardware to attach to them, including Macs, iPads, and Apple Watches.
The analyst calls the size and quality of Apple’s iPhone installed base “the glue behind this virtuous cycle” because Apple users tend to be quite loyal to the brand. The Goldman Sachs team estimates AAPL’S churn rate at less than 10% and notes that the company’s user base is easily monetized as the App Store enjoys 80% higher sales than the Google Play store does.
What a recurring revenue framework might look like
The analysts put together a scenario for recurring revenue that includes sales from the iPhone installment plan, Apple Music and Apple TV. The iPhone installment plan is $32 a month, while Apple Music is priced at $10 per month. They estimate that Apple TV will cost about $40 per month. They suggest that the company is currently seeing an average revenue per iPhone user of $42 per month, “pro rata for the current adoption rates of Mac, Watch, and services.”
Their new theoretical average revenue per user assumes all iPhone users also own other products and use the company’s other services and amounts to $153 per month. They said this suggests that AAPL can grow its sales significantly as its user base adopts more and more of its services and products.
Goldman Sachs has a $163 per share price target on AAPL. AAPL stock rose by as much a 2.93% to $117.02 per share during regular trading hours today.
